Thursday, March 4, 2010

A little follow up for people who want to reinterpret what Buffett said… oh – and a stock reason for looking at all of this…

There are a few comments on the blog that annoy me. One for instance is repeated below:

A review of the transcript will show that Buffett believes that: a) the legislation must focus on cost, in order to achieve the goal of universal coverage. This has nothing to do with socialized medicine; b) he believes a broader political consensus is required. Everyone is entitled to the their opinion, but not to someone else's.

Buffett clearly said he was for universality of health care. He would – if given no other choice – vote for the current bill. Universality – unless someone else has worked out how it happens – involves a person who can’t pay (or possibly won’t pay) being covered by other people. That can happen via the tax system or via some kind of forced levy on other people. But it necessarily involves the (partial) socialization of medicine.

He implies however – though does not say so directly – that universality (necessarily involving some socialization of costs) – could be a disaster if costs are not controlled. I will go further and say that it will be a disaster if costs are not controlled. Australia has spent the last twenty years on measures that control costs (with considerable success). In the UK – but to a much lesser extent in Australia – those measures include queue rationing of some services. Queue rationing known here as “hospital waiting lists” was for a long time one of the dominant issues in State politics. Queues are less of an issue now than (say) ten years ago – but if you run the expression “hospital waiting lists” through Google News you will still find that it is a political issue. Anyone who tells you that you can have universal coverage without some queue rationing is lying. A decent part of the system however is working out what procedures must take place quickly and what procedures can safely wait a while. In Australia some people are in pain whilst on waiting lists.

Buffett states clearly that controlling costs will not be done with a bill that pleases everybody. There are $2.3 trillion of costs – and every bit of those costs has a constituency. He wants a real analysis of medical spending effectiveness. He wants experts – and he points favorably at Dr Gawande. Dr Gawande focuses on things that involve medical incomes (including the use of the Doctor’s pen to order tests and specialist treatment).

He notes that medical employees as a percent of population are low in the US compared to other jurisdictions and yet medical expenditures are high as a proportion of GDP. Some of this must be expenditure that does not go to medical staff (he points directly at medical kit). But some of it must be the incomes of the participants are high relative to the rest of the population. [Simple math here – less employees – more cost – so more cost per employee. And I know kit is part of that equation… but kit expenditures are simply not large enough to make up the difference. And most of the rest of the cost of a doctor is the doctor’s income.]

Buffett does not prescribe how you would crush medical costs as he suggests – but he notes that other countries have done it with universal coverage, providing more doctors, more nurses and more consultations. He thus thinks it is possible (though politically terribly difficult). He specifically thinks that this cannot be done by consensus (despite the comment repeated above) because a bill that pleases everyone can’t deal with costs. [I added – though Buffett did not say – that that implies that the bill cannot be bipartisan. In the current context that means a filibuster process – though Buffett did not say that either. Still if there is a way for a non-consensus medical bill which provides universal coverage and cuts costs to be bipartisan show me and I will stand corrected.]

I doubt Buffett – as the world’s second richest man – would find queue rationing acceptable for himself – but that discussion never came up. If you want to accuse him of hypocrisy go ahead. When my wife damaged her knee in a skiing accident we queue jumped using supplementary private health insurance. So accuse me of hypocrisy too.

Buffett obviously knows that a system that radically cuts costs but has the government meet some of those costs will necessarily involve rationing. He is not a fool. He just never said how the rationing should take place – preferring to leave that discussion to experts. That way though he could sound reasonable and friendly whilst proposing reforms that will radically reduce some peoples’ incomes and somewhat limit access to medical care. And that I guess is Warren Buffett to a tee. He sounds all genial – but underneath is one of the most hard-headed men you will ever come across.

Why I am interested

This is actually a hard headed investment blog. And Buffett is right. Medical reform which does not control costs will be a disaster. He is also right to finger medical kit. The current bill does not address costs – so it is not the time to think about this – but some medical kit companies trade at nose-bleed valuations because they can sell growing amounts of high tech kit at high margins. (Intuitive Surgical is a good example.)

I am an irregular short-seller of stock in even the finest companies. When America finally gets serious about controlling medical costs some of these stocks will be fantastic shorts – simply because controlling costs means reducing some people’s incomes and some corporate profits.

And – that is enough reason to take the partisan glasses off and look entirely rationally a the problem. This bill does not give me a good reason to short Intuitive Surgical. From the perspective of Warren Buffett however that is why it is not a good bill.

John

Follow up:

Namazu - the provider of the comment that annoyed me - suggests we might be arguing over the meaning of socialized.

I think that is probably a fair comment... it is not a word Buffett used.

I consider the mixed market system of Australia partially socialized. By far the bulk of medical costs are picked up by government and are shared through the tax system - but it looks quite different to the UK. [My UK friends also prefer the Australian system…]

Still – a system where by far the bulk of the costs are picked up by government and shared through the tax system meets my definition of socialized. [Though people who say keep government hands off Medicare might have a different view…]

Still in many categories (for example pharmaceuticals) the Australian government is effectively the monopoly buyer - and it uses that power to reduce costs. That is a KEY part of the story as to how costs are reduced in almost all other countries.

For me, the standout message from the Warren Buffett interview is that as one of the most famous and successful proponents of capitalism, he is pointing out that present market forces and self-interest in the US are not capable of delivering efficient healthcare, now or in the future, without substantial government intervention.

I personally do not see the UK or Australia solution as the optimal solution either. At the heart of the provision of healthcare is the problem of information disparity between the consumer and the provider. Access to accurate, reliable information and the ability to process it is not equal between both parties. What is needed is a consumer advocate - one whose sole duty is to ensure that service is commensurate with the patient's interests and *financial resources*.

I see this as the exact same problem that confronts the truly massive global finance industry. How can an industry that shifts capital end up being larger than other industries that use the capital?

While sophisticated medical kit can be expensive to buy and operate another significant cost is consumables. A chemotherapy drug can cost $60,000 and a chemotherapy course often involves a mixed cocktail.

Healthcare is hard problem, and will get harder as we get better at keeping people alive despite all the odds. Especially since the economics is already getting in way of our (pefectly natural) human tendency of care (for example, do you keep someone on the machine for years, denying the machine to people who actually have a good chance of recovering? etc..)

I think that both purely private care and entirely gov't supported care are bad. One is because it has too much leverage over patients (customers too irattional), the other because it has from patient's perspective zero marginal costs (leading to queuing).

I don't know whether Singapore still has the model or not, but from what I vaguely remember, I liked it, and would propose something similar. Everyone had a "personal" account. I can't remember how the contributions are made, but let's even for equality sake say that gov't gives chunk of money to everyone, year in year out from the day you're born, and the account is treated as an inflation protected bond (i.e. paying real interest). At the same time gov't regulates healthcare in similar way as utilities (well, better than the UK utilities though), by mandating acceptable margins/RoI/pick-your-measure. All healtcare spending has to come from the healthcare account (so the size of the pie is limited and known, and treatments compete on efficiency of treatment and delivery).

It's then up to the individual to decide whether they want the minor problem fixed now, or keep the money in case they need a hearth by-pass. To an extent, it would work as an insurance - most people would accumulate money while young and relatively healthy, and spend them when old. It would mean that the costs are visible (people spending "real" money), and hopefully also mean that people would care about their health a bit. Of course, the system would have to be merciless at the same time - if you spend all your money on cosmetic surgery in 20s, and as a result can't have life-saving surgery in 30s, it's tough cookies. If the system isn't playing by the rules always, it is useless (lack of credible threat means threat is ignored).

I'd make an exception for emergency treatments and chronically ill, where gov't could contribute more to cover the cost of the treatment (one-off payments).

John, you keep blaming Doctor's costs, but my (probably out of date) thought was that both insurance and drugs are a far more egregious cost delta in the US vs. Aus/UK.

Fully socialised means almost no insurance - that happily kills off and entire industry who make decent margins and employ A LOT of people.

I still don't really understand it but despite being the largest buyer of pharma in the world Medicare still pays the highest prices - this is I believe down to the pharma lobbying strength.

So, two simple ideas would bring the US into closer alignment with better performing medical costs/GDP metrics: - Universal healthcare, with waiting lists, but no insurance necessary unless want to jump the queue.- Pay the lowest cost for pharma not the highest.

I also disagree that you can't have consensus over a bill that doesn't make everyone happy.You can't have UNANIMOUS for sure, but you can have consensus, otherwise no bills would ever pass.

price transparency only takes you so far if the consumer doesn't have the incentive to economize. If an MRI is $1500 at Hospital A and $1200 at Hospital B but the patient's insurer reimburses either way the patient will opt for whichever MRI is the most convenient. If however, the patient is paying out of pocket he will have an incentive to pocket the savings provided by Hospital B thus forcing Hospital A to compete for his business. This dynamic is simply absent in US healthcare.

I increasingly think the US is just completely screwed when it comes to medical care. There is no will by anyone to control costs. Indeed, no one actually "wins" by cost control--except the consumer. And nobody cares about the consumer.

I am generally very free market, but I would take Australia's system any day over the US one.

I am also always pissed about how much the US pays for expensive drugs, especially astronomically expensive ones that treat rare/terminal diseases.

If I were in charge of the government, I would cap reimbursement rates at the lowest rate prevailing in any country with per-capita income over a certain threshold. This would allow the US to take advantage of the "bargaining power" of other national healthcare services, which I think is very fair and would save us a hundreds of billions of dollars a year.

If those rich countries won't pay up for the drugs, then they won't get any. The end result will be lowering drug expenses across the world and possibly slower technological advances... But it's worth it.

It always makes me angry that the US taxpayer is subsidizing R&D for the rest of the world, and in turn have these other countries hector us about their "superior systems".

Interesting post. What is your feeling on the U.S. pharma stocks, which contra the equiment companies, trade at very discounted valuations (in some cases < 7x P/E). While the government is doubtless gunning fo their profit margins, it would appear this risk is pretty fully discounted....

Mike T is on the money. We need a better system but some foreign critics could do with a primer on who funds most of the world's advances in healthcare. Drugs, kits, procedures all target the US market because of size and pricing. All other countries have benefited from this. A little gratitude now and then wouldn't hurt.

I understand the Dutch and German Health Care systems are better than here in Oz. I think the US system is a nightmare.

In Germany I understand it is compulsory to have insurance and the Government is the main insurer with premiums a percentage of income. Pensioners do not have to pay for cover. High income earners can choose private cover as it is less expensive than the Government cover when your income gets above a certain level. There is high standard of care and limited rationing but there is an element of queue jumping if you have top level private cover.

I believe the Singapore system involves compulsory contributions to a superannuation fund that is for retirement mainly but can be accessed to buy property or health care. There are many with insufficient funds to pay for quality care. Many elderly people refuse care so they are not a burden on their family.

One of the big issues with rationing is the elderly. In Australia many doctors go to extraordinary lengths with elderly patients when the treatments do not significantly extend life or provide quality of life. This is the big discussion that needs to take place as it is a huge portion of health costs. Ultimately I can see limits will need to be placed on procedures for those over a certain age so that only palliative care is paid for.

"It always makes me angry that the US taxpayer is subsidizing R&D for the rest of the world, and in turn have these other countries hector us about their "superior systems"."

It always makes me angry to hear this horse shit. Which drug company/insurance company/K street firm do you work for?

As a true capitalist teabagger, I don't want any of my hard earned money going anywhere else but the US. The Queen herself could be choking on a chip and I would demand payment(set by me) for our homegrown 'advanced technology' to be deployed to save her.

The health care market is failing for multiple reasons. One reason not being discussed is the expectation that all people deserve uniform treatment at a uniform price. This lack of market segmentation creates an unworkable system that assumes everyone deserves a Lexus even if only a few can afford it.

Few medical technologies or pharmaceuticals are truly revolutionary. The latest product innovations may offer some benefits but they do not necessarily cure people any better than a technology from 10-years ago.

Unfortunately, people are not given the choice of choosing an older technology or treatment and saving on the difference in price. Where is the Ford Focus or frozen foods equivalent of medical treatment? Where is the "used" MIR service option that is half the cost of the latest technology?

Markets that fail to provide customers multiple choices at multiple price points will fail to maximize the utility of the customer. And when the services offered by that market are subsidized by the government the end result will be ever increasing costs, strained budgets and diminishing customer utility.

Your point about short selling is timely. The recent press on the Sigma Pharmaceutical wreckage shows what can happen to a company once the spigot for governmental spending is tightened a little. Whose next I wonder?

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The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Hempton's recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.